Biz Break: Hewlett-Packard's downfall hits rock bottom

A HP Invent logo is pictured in front of Hewlett-Packard international offices in Meyrin near Geneva in this August 4, 2009, file photo. Hewlett-Packard Co said on November 20, 2012, it took an $8.8 billion charge related to its acquisition of software firm Autonomy, citing "serious accounting improprieties," as it swung to a fourth-quarter loss. REUTERS/Denis Balibouse/Files

Another failed acquisition: The final nail in HP's coffin, or a new beginning?

Even before Tuesday's bombshell announcement that Hewlett-Packard believes its acquisition of British software giant Autonomy was based on faulty accounting, the legendary Silicon Valley company was struggling to retain its relevance, with sales slipping to the point that at least one analysis showed it was no longer the top PC company in the world and shares hitting decade low prices.

"Everyone expected discouraging news and HP delivered even worse news," Erik Gordon, a professor at the University of Michigan's business school, told Bloomberg News. "Their big acquisition to grow their cloud computing and big data business -- their future -- is a bust. Their existing business is deteriorating and their future business looks shakier than ever."

The only hope for those who still believe in the company is that it is the last of the skeletons in HP's closet, giving CEO Meg Whitman -- who says she is still very early in a five-year rebuilding plan -- a rock-bottom starting point to begin rebuilding the company that helped make Silicon Valley the hub of technology it is today.

"This kind of feels like the last of the bad news," Forrester analyst Frank Gillett told Reuters, in the most optimistic analyst statement of the day.

Whitman announced in the company's fiscal fourth-quarter earnings report that it believes Autonomy used a series of accounting maneuvers to overstate its financial performance, including misrepresentation of low-margin hardware sales as software sales, with costs booked as a marketing expense; sales to resellers counted as end-result sales; and subscription revenue accounted for on an incorrect basis.

"There appears to have been a willful effort on behalf of certain former Autonomy employees to inflate the underlying financial metrics of the company in order to mislead investors and potential buyers," Whitman said in a conference call Monday morning, adding that the malfeasance was discovered after a whistle-blower inside Autonomy came forward following the dismissal of the British firm's cofounder and CEO, Mike Lynch.

"I fear that this is a bit of a distraction on the day when they produce their worse set of results in the 70-year history of the company," Lynch added.

HP's earnings results were indeed gallingly bad, with revenue decreasing year-over-year in its core businesses, including a 14 percent drop in its personal-computer business. Total revenues for the quarter, which ended on Halloween, were $29.96 billion, down from $32.12 billion a year earlier and less than the average analyst forecast of $30.43 billion, according to Thomson Reuters research.

However, the struggles HP faces in attempting to grow revenues in the stagnating PC industry have been well-chronicled. HP's 2011 acquisition of Autonomy for more than $10 billion, masterminded by then-CEO Léo Apotheker, was meant to be a move in a new direction, as the company looked to follow IBM down the path of divesting the PC business and getting more squarely into the service industry, which has helped Big Blue remain a tech standard-bearer.

HP, aware of doubts about Autonomy, hired Deloitte to tear through its books with the help of KPMG, putting two of the world's most respected auditors on the case.

"Neither of them saw what we now see after someone came forward to point us in the right direction," Whitman said.

HP has referred its information to authorities in the United States and Great Britain, and -- if the allegations are proven true -- could sue to regain its lost fortune. But those gains would be a long way off in even the most optimistic scenario, and in the meantime, HP is left with a dwindling business and extreme doubts from investors and analysts, who were actually apologizing Tuesday for suggesting HP was a buy-low candidate.

This story has been an unmitigated train wreck," ISI Group analyst Brian Marshall said in a Tuesday note, later adding "We apologize to investors for our extremely poor performance on this attempted 'value' play."

Investors jumped out of HP's sinking ship Tuesday on Wall Street, sending the stock as low as $11.35, its lowest price since 1994. The company posted a decade-low closing price of $11.71 after dropping $1.59.

The markets were held afloat by more news that the housing industry's rebirth is strong. New home construction hit a four-year high according to a Tuesday report, which followed Monday's news of strong sales for previously occupied homes and homebuilder confidence that is at its highest since 2006. The reports combined to give a boost to hopes for the U.S. economy.

The big, bad "fiscal cliff" didn't stay far away from investors' thoughts, however: Federal Reserve chairman Ben Bernanke said in a speech that the central bank could not do anything to avert economic catastrophe should Congress not act before the tax hikes and revenue cuts kick in, but believes that 2013 will be a strong year for the U.S. economy barring an impasse on the issue.

This is a more realistic and pragmatic picture of where we are, compared to what we've been hearing for the past couple of days from politicians that are mostly PR stunts," James Dailey, portfolio manager at TEAM Asset Strategy Fund, told Reuters.

Tech stocks struggle as Intel falls a day after Otellini announcement

Silicon Valley tech stocks performed worse than the rest of the market Tuesday, as the SV150 index of the region's largest technology companies dropped 0.7 percent.

On the positive side, Gilead gained 1.3 percent as the U.N. said that drugs treating HIV and AIDS -- one of the Foster City company's largest initiatives -- were showing fruit and making the disease feasibly beatable. Social-networking stocks has a decent day, with LinkedIn improving by 1.2 percent, Facebook increasing 0.8 percent and Zynga jumping up 2.7 percent.

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Check in weekday afternoons for the 60-Second Business Break, a summary of news from Mercury News staff writers, The Associated Press, Bloomberg News and other wire services. Contact Jeremy C. Owens at 408-920-5876; follow him at Twitter.com/mercbizbreak.